“My name is Brad DeLong. I am a Rubinite, a Greenspanist, a neoliberal, a neoclassical economist. I stand here repentant.”
So starts this great piece of honest reflection by a Professor in Berkeley, US.
Here are some more snippets…
The highly leveraged banks did not have control over their risks. Indeed if you read the documents from the SECs case against Citigroup with respect to its 2007 earnings call, it is clear that Citigroup did not even know what their subprime exposure was in spite of substantial effort by management trying to find out. Managers appeared to have genuinely thought that their underlings were following the originate-and-distribute models to figure out that their underlings were trying to engage in regulatory arbitrage by holding assets rated Triple A as part of their capital even though they knew fracking well that the assets were not really Triple A.
Back when Lehman Brothers was a partnership, every 30-something in Lehman Brothers was a risk manager. They all knew that their chance of becoming really rich depended on Lehman Brothers not blowing as they rose their way through the ranks of the partnership.
By the time everything is a corporation and the high-fliers’ bonuses are based on the mark-to-model performance of their positions over the past 12 months, you’ve lost that every-trader-a-risk manager culture. i thought the big banks knew this and had compensated for it.
I was wrong,
….The Federal Reserve should do the countercycical stabiization job.This also turned out not to be true, or not to be as true as we would like. When the Federal funds rate hits the zero lower bound making monetary policy effective becomes complicated. You can do it, or we think you can do it if you are bold enough, but it is no longer straightforward buying Treasury Bonds for cash. That is just a swap of one zero yield nominal Treasury liability for another. You have got to be doing something else to the economy at the same time to make monetary policy expansion effective at the zero nominal bound,
One thing you can do is boost government purchases. Government purchases are a form of spending that does not have to be backed up by money balances and so raise velocity. And additional government debt issue does have a role to play in keeping open market operations from offsetting themselves whenever money and debt are such close substitutes that people holding Treasury bonds as saving vehicles are just as happy to hold cash as savings vehicles. When standard open market operations have no effect on anything, standard open market operations plus Treasury bond issue will still move the economy.
…I thought that American governments understood that high unemployment was very hazardous to incumbents. I thought that even the most cynical and self-interested Congressmen and Congresswomen and Presidents would strain every nerve to make sure that the period of high unemployment would be very short.
It turned out that that wasn’t true.
I really don’t know why. I have five theories:
- Perhaps the collapse of the union movement means that politicians nowadays tend not to see anybody who speaks for the people in the bottom half of the American income distribution.
- Perhaps Washington is simply too disconnected: my brother-in-law observes that the only place in America where it is hard to get a table at dinner time in a good restaurant right now is within two miles of Capitol Hill.
- Perhaps we are hobbled by general public scorn at the rescue of the bankers–our failure to communicate that, as Don Kohn said, it’s better to let a couple thousand feckless financiers off scot-free than to destroy the jobs of millions, our failure to make that convincing.
- I think about lack of trust in a split economics profession–where there are, I think, an extraordinarily large number of people engaging in open-mouth operations who have simply not done their homework. And at this point I think it important to call out Robert Lucas, Richard Posner, and Eugene Fama, and ask them in the future to please do at least some of their homework before they talk onsense.
- I think about ressentment of a sort epitomized by Barack Obama’s statements that the private sector has to tighten its belt and so it is only fair that the public sector should too. I had expected a president advised by Larry Summers and Christina Romer to say that when private sector spending sits down then public sector spending needs to stand up–that is is when the private sector stands up and begins spending again that the government sector should cut back its own spending and should sit down.
I have no idea which is true.
